Saturday, July 30, 2011

Big Corp Tax Loophole Closer #30: Interest Shifting

Maximizing capital contributions to foreign subsidiaries, which have low income tax rates, is a very prevalent tax strategy use by US Big Multinational Corps.

This practice results in shifting income from the high-taxed US to the lower taxed foreign subsidiary.

To at least somewhat close this abusive Big Corp tax loophole, for US federal income tax purposes, I would include in US taxable income each year, a fair computation of imputed inter-company interest income, for foreign subsidiaries that have an unreasonably high amount of cumulative capital contributions.

The Feds need to decide the fair numbers here. But let me just give an illustration of how I think it could work.

One way to determine if a low income taxed foreign subsidiary, like one in Ireland or in Singapore, is unreasonably overcapitalized, is to compare the foreign subsidiary’s total capital contributions on its balance sheet to its total interest-bearing debt.

If this ratio is deemed to be too high, then imputed interest income on some measure of this excess capital should be added each year to US federal taxable income of the US parent.

The substantial amount of US taxes raised from this proposal should be used to reduce the US Deficit.